PolarityTE (PTE), a micro-cap biotech in the regenerative medicine space, is truly a hidden gem. The company’s lead product is an autologous, homologous SkinTE construct. SkinTE technology is used to regenerate functionally-polarized, hierarchically-organized, hair-bearing skin in full-thickness burns and wounds.
This is dramatically different from the current standard of care for treating burns and wounds, called STSG (split-thickness skin grafts). STSGs involve transplanting 2 layers of the skin, epidermis and very top layer of the dermis, from the unharmed part of the patients’ body to the wound site. However, this presents multiple challenges such as high failure rate due to graft rejection, insufficient skin from donor sites, reduced functionality of the transplanted derma, and significant post-surgery care. Besides, this procedure is time-consuming and very expensive.
In this backdrop, a novel and effective technology like SkinTE can definitely prove paradigm change in the burns and wounds area. In this article, I will highlight some factors that make PolarityTE an attractive pick in fiscal 2019.
SkinTE has demonstrated significant efficacy over STSGs
SkinTE is a human cellular and tissue-based product where a small part of the patient’s skin is used to regenerate full-thickness, functional skin. The product aims to regenerate all with all skin layers such as epidermis, dermis, and hypodermis as well as appendages, including hair follicles and glands.
In the first quarter, PolarityTE reported 50% QoQ rise in SkinTE deployments. The company will be using FDA’s 361 pathway for securing regulatory approval for SkinTE. The company is mostly focused on the chronic small wound care segment.
In the first quarter, the company reported acceptance of 14 abstracts associated with SkinTE for presentation at national and international conferences. One of these abstracts received the top abstract special designation at the Diabetic Limb Salvage Conference in Washington DC. This success is important, considering that it to be a step ahead for the company in its quest to target $58 billion worth lower extremity wound care market.
The company presented data from a pilot study evaluating the single application of SkinTE to close DFUs (Diabetic foot ulcers) that had not healed with conventional treatment strategies. It was seen that ten out of 11 patients had healed DFUs within eight weeks of SkinTE application. The mean time to heal was 29.7 days. SkinTE demonstrated 100% wound closure in the trial for these 10 patients after 12 weeks, a huge improvement from the 40% closure seen with the standard of care.
With around 3.5 million Americans suffering from difficult-to-treat DFUs, SkinTE is targeting a highly underserved market opportunity. The importance of SkinTE in this indication becomes even clearer when we consider that DFUs can also lead to amputation.
On May 10, PolarityTE announced interim data from a pilot trial evaluating the single application of SkinTE in venous leg ulcer wounds, which were either difficult to treat or had failed to heal with standard dressing care and conventional treatments. In the study, all five tested patients demonstrated complete wound closure within 12 weeks of application. Further, the wounds remained closed, with no adverse events, during follow-up visits at least 14 weeks post initial SkinTE application.
The two trials precede two multi-center randomized controlled trials planned by the company for comparing SkinTE to the standard of care in diabetic foot ulcers and venous leg ulcers. PolarityTE aims to not only highlight efficacy but also the cost-effectiveness of SkinTE in these trials.
Besides, PolarityTE is also enrolling patients in a head-to-head trial comparing skin grafts to its SkinTE product for burns.
The company is working on fine-tuning its commercial strategy, to increase adoption of SkinTE
PriorityTE currently services 100 active users, which includes individuals who have used the product commercially either in a trial evaluation process or entered into a purchase agreement with the company and used the product for day case. The company is servicing these users with commercial team of 19 sales representatives, five clinical science managers, and 10 home office support staff. The company will be hiring six additional more sales reps to support demand in several major metropolitan areas. The demand comes across multiple settings such as chronic wound, trauma, and reconstruction.
However, at the end of the first quarter, the company had 433 in-process sites, which are hospitals and clinics that have initiated the analysis community review, a trial evaluation agreement or purchase agreement. While not active today, these providers are expected to start using SkinTE commercially in the next six to nine months. To leverage this opportunity, the company plans to significantly expand its sales force.
To focus on the burns segment, the company will be hiring a small group of three to five sales representatives with significant experience in burn care. The company plans to partner with the burn centers to enable them to integrate SkinTE in their current and existing treatment algorithms. The company also plans to partner with larger burn centers from a clinical trial perspective to gain additional experience and further fine-tune SkinTE.
SkinTE is yet to receive full FDA approval. Despite this, the robust efficacy of the product has enabled the company to enjoy broad coverage even in the early stage of commercialization. The product is being reimbursed both in inpatient and outpatient setting, across the chronic wound, trauma, and burns indications. The company does not consider payer access as a rate-limiting factor. Instead, it believes that reimbursement will further improve as more number of patients are treated with SkinTE.
The company is rapidly advancing other products in its research pipeline
The next main product in PolarityTE’s portfolio is OsteoTE. Launched in late 2018, OsteoTE is regenerative medicine technology intended for bone repair, reconstruction, replacement, supplementation, and regeneration. This technology is targeting long bone, craniomaxillofacial, spine, dental, hand, and foot/ankle markets.
PolarityTE has focused the limited market release of OsteoTE in foot and ankle and craniomaxillofacial segments. The company aims to leverage its commercial relationships with foot and ankle specialists and reconstructive surgeons. Only after completion of limited market release in these areas, the company plans to focus OsteoTE’s launch in other bone-related markets.
The company is also studying cartilage regeneration technology, CartTE, in preclinical trials.
Certain risks must be considered for PriorityTE.
The biggest risk for PriorityTE is the company’s existing commercialization strategy. Instead of focusing on the high-paying burns segment, the company is currently focused on the significantly lower-paying chronic wound space. The company has highlighted this as a response to market demand. However, this strategy has significantly dampened the company’s revenue growth trajectory, despite having a transformational product with not much competition.
PriorityTE is also getting some pushback from burn specialists related to pricing of SkinTE. The price of $1,000 per case for smaller wounds is being considered to be a deterrent for the adoption of this technology.
At the end of the first quarter, PolarityTE had cash worth $44.65 million on its balance sheet. In April, the company raised a capital worth $29 million from the issuance of equity in an underwritten public offering. As per the company’s estimates, it has significant funds to sustain its operations till the end of the first quarter of fiscal 2020. The limited cash may prove to be a challenge for the company, considering its cash burn rate and slow revenue growth trajectory.
Despite these risks, I believe PriorityTE is an attractive investment in 2019
Trading at a P/S of 29.87x, PriorityTE is a pretty expensive pick, considering that it is still loss-making and low on cash resources. However, this valuation accounts for the disruptive nature of its technology and the huge untapped addressable market.
In this backdrop, I believe that the Wall Street 12-month consensus target price for the company of $27.43 may be an accurate depiction of the growth potential of this stock. However, it remains that the company will have to improvise on its commercialization strategy to leverage this opportunity.
In this backdrop, I believe PriorityTE can be a promising buy-and-hold investment for the retail investor with above-average risk appetite.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.